Ken Ramsey & Purse Red Herrings

Yesterday, big time horse owner and breeder Ken Ramsey made some major waves with his comments on Keenelend (35 minute mark and on). Quips like "they make Benedict Arnold look like a patriot", and a call for players (and the industry) to boycott the track through withholding their wagering got the most play, and deservedly so.

But he also touched on the so called reason for the takeout hike - to increase purses. Ramsey believes that it's a red herring because Keeneland gets so much of its revenue from alternate means - gaming, sales and the like. He's probably correct.

But the reason itself is suspect. Sure it's arguable that raising takeout even increases purses; in the long run it likely doesn't. However, I suspect Ramsey knows what everyone else does. Even if purses are raised, they are not optimally distributing revenue to the business, and the proposed net benefit - more horses purchased, more horse owners getting into the game - is simply not there.

The economics of $90,000 MSW's instead of $70,000 MSW's, to me, is a little like health care economics. In the US, for example, the lack of economic rationing of services causes costs to be higher, physicians allow for more tests, and the private market creates more and more products that are costly. What it does not do is allocate scarce resources in what economists call a Pareto efficient manner; which loosely means things are doing what they should, where everyone is better off.

For example, injecting capital into purses that are already at high levels does not attract more betting dollars, does not attract more owners, and causes some inflation to be injected into the system where everyone's costs go up.

For you and me, that means this MSW for us as a local owner means nothing if Chad Brown and Todd Pletcher send more horses. This means - for you and me with a small string - we're priced out of the race anyway, and worse, we check our supplement, shoeing and vet bills for our claimers at the end of the month and see the prices went up, hurting us even further.  We might as well go race at Indiana Downs or Penn National, and many of us do.

The next time we see a 5 horse MSW for $90,000 and scratch our heads, there are reasons for it. Believe me, the short field is not there because horse owners don't like money.

So, like Ramsey, many of us are often left dumbfounded by rudimentary decision making like this. It's a multi-billion dollar business, but at times it feels like new policies are enacted on the back of a napkin over a round of martinis. If that continues - and it likely will, it has not changed in generations - I don't think Pareto efficient outcomes when it comes to purse money or takeout rates are anywhere near being a realization.

Pass me another martini, and enjoy your weekend everyone. And thanks Ken. It's nice to see bettors and leading owners at the Keeneland meet on the same page. Hey, it's magical place, so magical things happen.

If Racing Wants to Make Big Wagering Decisions, At Least Study the Numbers

For a long while, we've often wrung our hands at how the business of horse racing (publicly at least) studies their facts and figures when it comes to wagering.

What should be a deep dive - something that looks at things with a microscope with statistical significance attached - is often fishing in a pond; a pond stocked with whatever fish you're looking for to boost your argument.

I read this line in a few places, regarding the Keeneland takeout increase, and it's been passed around some as a justification for raising rates.

"Churchill Downs boosted its rates to the same thresholds in 2014, and records indicate that despite horseplayer backlash handle has continued to increase slightly over the past several years, from $501.3 million in 2014 to $511.8 million in 2015 and $516.9 million last year."

There are many problems with this 'fact', and this is very common in the horse racing business when racetracks offer out new policy.

• The numbers include Derby week, which is an outlier. If it rained a few years, turf cards cancelled and handle tanked, it had little to do with a takeout rate. Derby week is, arguably, one of the least price sensitive week in all of North American racing.
• The numbers do not include 2013, which was the last year at the old (lower) takeout rates
• Field size and number of races have an effect - the elasticities for both are, according to a 1998 study, about -0.6. 
• The business never includes real numbers, i.e. real as in including inflation rate. $501M in 2014 is worth $510M in 2016 for example. If the price of hay goes up, handle needs to go up too.
• We'd want to look at underlying subsets for comparison and to gauge market share.  If Wal Mart sales are flat, but Dollarama up 15%, Wal Mart is going to want to know it. 
• Factors - like the organized Churchill Downs boycott in 2014 - can be important and need to be examined

So what can we learn about Churchill's takeout hike, if anything?

In 2013 (omitted from the above statement), outside Derby week, at the 16%-19% takeout rates, handle was $322.6M.

In 2014 at the takeout rates Keeneland just hiked to, this handle was down to $248.4M, or off about $74 million.

2015: $252.6M

2016: $260.8M

Since 2013, total handle outside the Derby is down about 20%, or $62 million.

When looking at handle per entry, which includes field size, number of races and controls a little for weather and other outlying issues, the handle is down 13% since they changed the takeout rates.

When looked at the underlying handle numbers, which are down about 2% since that time (2.29% with inflation), Churchill has done appreciably worse.

Another phenomenon we've noticed is that large signals at big tracks are doing better since 2013. Last year, for example, tracks with over $200M in meet handle grew at 12% in gross. Churchill is one of these tracks and has not followed suit - they've been down (although in 2017 they seem to be catching up after a decent couple of months).

On the surface handle is down 20%, per entry handle down 13% and $62 million less is bet than it was a few years ago.

Those who are pro-takeout hike, or carry water for industry decisions often pivot their argument by moving the goalposts at this point, and talk about gross revenue. That, in my view, is a complete rabbit hole that does no one any good at all. As I've often noted, if any track wants to increase gross revenue for a few years just double takeout rates and that will happen. It's what happens afterwards that's the problem. When Italy doubled trifecta takeout to 41% revenue was up for awhile, but now Italian racing is Blockbuster Video.

So, it's the time I should probably conclude that the takeout rake hike was absolutely horrible - the worst thing ever! After all, $322M in handle down to $260M with other big signal tracks holding their own or growing since that time, dates down, races down, and horses entered down is not good news. The supply and demand ecosystem have both struggled.

But if I have a lick of intellectual honesty, I can't even do that - with rebating, signal fees, upwards of handle coming from large players, and other "noise", we can't really conclude anything with 100% certainty. At best we can say the takeout increase at Churchill probably didn't do any good - other than the increased "EBITDA" Derby week, which they could've achieved by hiking takeout for Derby week alone.

What I offer as an argument is simple: What makes for analysis in this business when people argue big, important items, is poisonous to the future of horse racing. Without honest, detailed, statistically significant modeled data, the sport will never get anywhere. And we'll likely see more moves like Keeneland did Monday, buttressed with low hanging fruit data, that says whatever they want it to say.

Anger at Keeneland is Different Because It's an Old Friend

When a takeout increase is announced there's usually some grumbling. Let's face it, no one in their right mind is happy with a price hike; even a smaller but dedicated player who bets $1,000 in a meet and made $50 will find herself now losing money. No one likes to spend hours and hours at a craft, to lose when they used to win.

This time though, it feels much different. The breadth of the complaints are wider - horseplayers yes, but it's also industry watchers, some horsemen and some in the press. There's a sense of deflation from so many quarters. I think this makes some sense.

Over the years Keeneland has always been the track we've leaned on; the track we'd say to non-fans, "go to Keeneland, it's horse racing and they care." It's the track that when you walked in the door you felt catered to, important; whether you were betting $2, or bidding $2 million on a horse, it did not matter. It's the track where it seemed Nick Nicholson would spend as much time talking to customers, asking what they want to be better customers, as he would at the sales, shaking hands with breeders.

The Keeneland brand was built on these pillars; built on them so much that they are in their mission statement.

It's never like this at other tracks. We know CDI will run numbers and harvest bettors. We know So Cal and the CHRB to be mired in constant committee and usually come up with something we shake our heads at. Keeneland was the port in a storm. It was horse racing done right. It was the "do no evil" racetrack. They were Keeneland, they weren't them.

When a strong brand - any strong brand - is built on something and sold on something and then goes a full 180, it sticks out like a sore thumb. As I read someone say, it feels like a 'betrayal'.

In horse racing when you wake up and see a track slept with your husband, it is what it is; this industry has not made the best decisions. But with Keeneland, it's like you just found out they slept with your maid of honor on your wedding night. It's not who we thought our old friend was, and that punches you right in the gut.

Have a nice Wednesday everyone.

Horse Racing's Bill Murray Wagering Model

There are plenty of internet rumors that low-takeout, value stalwart Keeneland is looking at raising their takeout rates on selected bets. This, for your average horseplayer who has more and more trouble finding churn, is certainly disconcerting. However, in my view it's part of an overarching trend in horse racing, and it's been going on for some time.

Twenty years ago horse racing was in a pretty decent spot -- slots were churning, supply was up, and purses were fairly solid. The wagering numbers, however, were pretty much flat.

About the same time a new way to play horses was emerging, though, through rebating. Price sensitive punters could find - if you looked, at times pretty hard - deals on wagering that lowered their takeout and increased their churn.

The reaction from racing was, well, to put it mildly, not very welcoming. You heard a lot about how it would be the death of racing (because, the thinking said, charging 22% was the only way to stay afloat), and that the "show" would suffer. These shops were shunned for the most part, and places like Woodbine not only would not sell to them, they lobbied hard to have them shut down.

Over the next several years, despite barriers to entry, handle blossomed. Racing could not keep the genie in a bottle, and with their best customers demanding better deals, had to let the market talk. By 2003, forward thinking shops like Premier Turf Club were bringing lower takeout mainstream, to even smaller players.

This is about the time handle peaked.

Fifteen or so years on, racing, who shunned this rebated action, and who tried mightily to stop players from receiving lower juice, have now embraced it -- as long as they are the one's giving the lower juice. Instead of Premier Turf Club, and others, it's now the large entities themselves owning this space. Xpressbet, for example, has a shop, as does CDI.

An issue with this, is that lower juice is no longer mainstream. Yes, racing has embraced the concept of lower takeout, but they will dictate who gets it, and that person or persons are the ones already betting a lot of money.

Why this can be dangerous, in my view, is that it allows racing's braintrust to cling to old models. Since about 2015, they believe that top line takeouts can go up for new players and existing players who don't bet much, and signal fees can go up in the same fashion (to crowd out lower level rebating ADW's). These players then subsidize the larger ones, who will continue to get lower juice. 

I believe this is why you're seeing so many tracks look to top line takeout hikes. They've subset the customer base, and are employing the same harvesting strategy they always have. Smaller players pay more, larger players are continuing to pay the same.

What's odd, and this seems to happen often in racing: The entities which never saw the market changing with rebating and lower takeout - in fact, the industry that called it "pirating" - are now trying to run the system based on a model they hated and never believed twenty years ago. But they've made it even worse.

I believe this mindset will be the preferred racetrack narrative for about 10 to 15 more years. At that point, when it doesn't work to grow top line and handle is again degraded, they will begin to pivot to the place they probably should've pivoted to in the year 2000. We will probably see lower takeout for the masses through expanding rebates, 8% (or lower) fixed odds wagering, and a more modern big-tent system.

Smaller players, or those looking for deals to remain every day players, have been, and will continue to be in a very precarious position. They will continue to leave, or bet a few dollars on the weekends. The top of the funnel is not healthy, and with this strategy, will not get any healthier.

The 'Helping Players Win' Mindset

I caught an email from Draft Kings today:

I can dig it @DraftKings. pic.twitter.com/Hjr1Yw9sbf

— Dan Gaspar (@MrTuttle05) August 1, 2017

This is a response to the phenomenon of larger players playing into small tournaments, and scaring away smaller customers. Draft Kings, as well as other DFS sites, have the same issue all other pari-mutuel type skill games have: Sharks trying to scoop money from the fish, and the fish leaving to swim in other waters.

Draft Kings believes that without new players they will probably, over time, fail.

This interested me because a DFS site like this (and before them, places like Betfair.com) have to answer to one person for their success or failure: The Customer.  It's pretty basic.

As time goes on, or if the structure of the business is dependent on more than a customer, that's when things can possibly go off the rails; for example, if the regulatory environment is leaky, if they have to pay high fees to racetracks, if they have to answer to shareholders.

The problem for racing in all this is that many of their competitors for the skill game gambling market are focusing on customers, and achieving top line growth. DFS, despite its problems with governments of late, has been growing - they're up to $3.2B in handle as of last year. Sports betting in Vegas, which is only one small slice of that type of wagering is growing - handle has doubled since 2006. E-sports, which is just beginning, has focused on their base and is building. Some scenarios have it doing $13B in handle in 2020, or more than horse racing currently does.

Helping your customer win simply means you're helping them enjoy the game more. Racing tends to lean on bankroll degradation - jackpot bets, higher signal fees, rebates to only large players - rather than bankroll generation. In itself that might be okay, but it's not 1950 anymore and the skill game markets they're competing with are now there to scoop tired and broke bettors up like never before.

Have a nice day everyone.